Question

1. The controller of Sonoma Housewares Inc. instructs you to prepare a monthly cash budget for the next three months. You are presented with the following An accounting device used to plan and control resources of operational departments and divisions.budget information:

   	May		June		July
   Sales	$86,000		$90,000		$95,000
   Manufacturing costs	34,000		39,000		44,000
   Selling and administrative expenses	15,000		16,000		22,000
   Capital expenditures	_		_		80,000

   The company expects to sell about 10% of its merchandise for cash. Of sales on account, 70% are expected to be collected in the month following the sale and the remainder the following month (second month following sale). Depreciation, insurance, and property tax expense represent $3,500 of the estimated monthly manufacturing costs. The annual insurance premium is paid in September, and the annual property taxes are paid in November. Of the remainder of the manufacturing costs, 80% are expected to be paid in the month in which they are incurred and the balance in the following month.

   Current assets as of May 1 include cash of $33,000, marketable securities of $40,000, and accounts receivable of $90,000 ($72,000 from April sales and $18,000 from March sales). Sales on account for March and April were $60,000 and $72,000, respectively. Current liabilities as of May 1 include $6,000 of accounts payable incurred in April for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. An estimated income tax payment of $14,000 will be made in June. Sonoma’s regular quarterly dividend of $5,000 is expected to be declared in June and paid in July. Management wants to maintain a minimum cash balance of $30,000.

   Required:

   1. Prepare a monthly cash budget and supporting schedules for May, June, and July 2016. Input all amounts as positive values except overall cash decrease and deficiency which should be indicated with a minus sign.

   Sonoma Housewares Inc.
   Cash Budget
   For the Three Months Ending July 31
   	May	June	July
   Estimated cash receipts from:
   Cash sales	$	$	$
   Collection of accounts receivable
   Total cash receipts	$	$	$
   Estimated cash payments for:
   Manufacturing costs	$	$	$
   Selling and administrative expenses
   Capital expenditures
   Other purposes:
   Income tax
   Dividends
   Total cash payments	$	$	$
   Cash increase or (decrease)	$	$	$
   Cash balance at beginning of month
   Cash balance at end of month	$	$	$
   Minimum cash balance
   Excess or (deficiency)	$	$	$

   Feedback

   2. The budget indicates that the minimum cash balance

   • will
   • will not
   be maintained in July. This situation can be corrected by
   • investing
   • borrowing
   and/or by the
   • purchase
   • sale
   of the marketable securities, if they are held for such purposes. At the end of May and June, the cash balance will
   • exceed
   • b

Answer 1

Solution 1:

Computation of Collection from Customer
Particulars	May	June	July
Collection for March Sales	$18,000.00
Collection for April Sales	$50,400.00	$21,600.00
Collection for May Sales		$54,180.00	$23,220.00
Collection for June Sales			$56,700.00
Total cash collections	$68,400.00	$75,780.00	$79,920.00
Computation of Cash payment of manufacturing costs
Particulars	May	June	July
Payment for April Manufacturing cost	$6,000.00
Payment for May Manufacturing cost	$24,400.00	$6,100.00
Payment for June Manufacturing cost		$28,400.00	$7,100.00
Payment for July Manufacturing cost			$32,400.00
Total cash disbursements	$30,400.00	$34,500.00	$39,500.00

Sonoma Housewares Inc.
Cash Budget
For the Three Months Ending July 31
Particulars	May	June	July
Estimated cash receipts from:
Cash sales	$8,600.00	$9,000.00	$9,500.00
Collection of accounts receivable	$68,400.00	$75,780.00	$79,920.00
Total cash receipts	$77,000.00	$84,780.00	$89,420.00
Less estimated cash payments for:
Manufacturing costs	$30,400.00	$34,500.00	$39,500.00
Selling and administrative expenses	$15,000.00	$16,000.00	$22,000.00
Capital expenditures			$80,000.00
Other purposes:
Income tax		$14,000.00
Dividends			$5,000.00
Total cash payments	$45,400.00	$64,500.00	$146,500.00
Cash increase or (decrease)	$31,600.00	$20,280.00	-$57,080.00
Plus cash balance at beginning of month	$33,000.00	$64,600.00	$84,880.00
Cash balance at end of month	$64,600.00	$84,880.00	$27,800.00
Less minimum cash balance	$30,000.00	$30,000.00	$30,000.00
Excess or (deficiency)	$34,600.00	$54,880.00	-$2,200.00

Solution 2:

The budget indicates that the minimum cash balance will not be maintained in July. This situation can be corrected by borrowing or by the Sale of the marketable securities, if they are held for such purposes. At the end of May and June, the cash balance will exceeds the minimum desired balance.